Timely reminder of need to reconsider tax framework

THE collapse in oil prices and the Covid-19 economic fallout, both of which have a negative impact on Malaysia’s revenue, are timely reminders of the need to reconsider the current tax framework.

According to Deloitte Malaysia country tax leader Sim Kwang Gek, for long-term sustainability of revenue, the government has to diversify its tax base.

She notes that amid the coronavirus pandemic, which has impacted the incomes of corporations and individuals, the government can see a significant decline in tax revenue for 2020.

“With the Covid-19 pandemic, and Malaysia projecting a growth of –2% to 0.5% for 2020, compared with a growth of 4.3% in 2019, the targeted tax revenue collection may seem unattainable,” Sim says.

“The government would need to revisit the numbers,” she tells Starbizweek.

Given the anticipated economic slowdown, Sim notes that companies would revise downwards their income tax estimates, and therefore, this would have an impact on income tax collections for the year.

She adds that there could also be a sharp decline in individual income tax collection if employers exercised caution by trimming headcount or implement pay cuts.

Sim, however, says it is difficult to quantify the impact, as only the Inland Revenue Board (IRB) can estimate how much the tax collection is expected to decline for 2020.

In a recent media interview, IRB chief executive officer Datuk Seri Dr Sabin Samitah conceded that the Covid-19 pandemic would put a dent on the government’s tax revenue this year.

However, he claimed the impact would be minimal, as the country had a strong revenue base to offset the shortfall in tax collection.

He noted some sectors were doing well due to increased demand amid the Covid-19 pandemic. These sectors included glove manufacturing, certain retail segments, as well as the medical and pharmaceutical industries.

During the Budget 2020 announcement last year, the government expected tax revenue to increase by 5.5% year-on-year in 2020, with total tax revenue accounting for approximately 78% of total federal government revenue.

Out of the projected total tax revenue of Rm189.95bil in 2020 (versus Rm180.01bil in 2019), close to 40% represented corporate income tax whilst the balance is made up of individual income tax (20%), indirect tax (25%), petroleum income tax (9%) and other taxes (6%).

“To achieve a sustainable tax revenue collection, it is timely to look at the current tax framework and consider diversifying the tax base,” Sim says.

On how fast businesses can recover from the Covid-19 fallout, Sim says that would depend on a number of factors such as adaptability and agility of businesses to disruption and change; global economic recovery; extent of government measures and assistance; and the availability of a vaccine to fight the virus.

“There are indeed opportunities in every crisis and we need to ‘strike while the iron is hot’,” she says.

In this instance, she notes the formation of the Economic Action Council to ensure sustainable domestic economic growth and boost investors’ confidence was a welcomed move.

“A special task force can be set up within the government ministry to map out strategies to capture opportunities arising from this crisis. For example, the need to realign global supply chains will present opportunities for Malaysia to target specific sectors to relocate part of the supply chain to Malaysia,” Sim explains.

‘This pandemic has also caused many large organisations to consider the decentralisation of global business centres, and Malaysia, which is home to many global shared services centres, can be an ideal location for multinational companies to locate one of their business hubs,” she adds.

Meanwhile, Ernst & Young Malaysia Tax Leader Amarjeet Singh says it is crucial for companies to build resilience to prepare for and respond to trigger events before options evaporate and the risk of losing control increases.

“To respond to the Covid-19 pandemic, companies should consider their strategies across the ‘now’, ‘next’ and ‘beyond’ horizons,” Amarjeet tells Starbizweek.

“Solving the ‘now’ is really about responding to the crisis by taking steps now to stabilise their business, maintain continuity and manage the crisis.

Exploring the ‘next’ is to focus on building enterprise resilience, to manage and operate a restricted business, leading through ongoing business disruption.

Finally, imagining the ‘beyond’ is about understanding the ‘new normal’ that will emerge beyond the crisis, reframing their future to align with it and transforming to succeed,” he explains.

He notes that companies would need to look at the three horizons from four broad aspects of people safety and wellbeing; building and securing liquidity; protecting business continuity; and engaging stakeholders.